Chapter7: Stocks (equity) - Characterstics And Valuation
Section: Chapter Questions
Problem 10PROB
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H5.
In practice, a common way to value a share of stock when a company pays dividends is to value the dividends over the next five years or so, then find the “terminal” stock price using a benchmark PE ratio. Suppose a company just paid a dividend of $1.41. The dividends are expected to grow at 13 percent over the next five years. In five years, the estimated payout ratio will be 30 percent and a benchmark PE will be 19. The required return is 11 percent.
a) What is the target stock price in five years?
b) What is the stock price today?
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